Sunday, June 18, 2017

One More Possible Explanation: "Financial Frictions and the Great Productivity Slowdown"

From The Hill:

Prodding productivity is pivotal to procuring prosperity

One of the keys to understanding the very sluggish recovery from the
Great Recession of 2008-09 is the slowdown in productivity growth. Total
factor productivity — a measurement of how much economic output is
produced from a given amount of labor and capital — has almost stopped
growing over the last 10 years.

Without increased productivity,
our economy can only grow if we add more labor and capital. Rapid growth
requires both increased productivity and increased growth in employment
and investment in capital.

Disclaimer:
IMF Working Papers describe research in progress by the author(s) and
are published to elicit comments and to encourage debate. The views
expressed in IMF Working Papers are those of the author(s) and do not
necessarily represent the views of the IMF, its Executive Board, or IMF
management.

Summary:

We study the role of financial frictions in explaining the sharp and persistent productivity growth
slowdown in advanced economies after the 2008 global financial crisis. Using a rich cross-country,
firm-level data set and exploiting quasi-experimental variation in firm-level exposure to the crisis,
we find that the combination of pre-existing firm-level financial fragilities and tightening credit
conditions made an important contribution to the post-crisis productivity slowdown. Specifically:
(i) firms that entered the crisis with weaker balance sheets experienced decline in total factor
productivity growth relative to their less vulnerable counterparts after the crisis; (ii) this decline
was larger for firms located in countries where credit conditions tightened more; (iii) financially
fragile firms cut back on intangible capital investment compared to more resilient firms, which is
one plausible way through which financial frictions undermined productivity. All of these effects
are highly persistent and quantitatively large—possibly accounting on average for about a third of
the post-crisis slowdown in within-firm total factor productivity growth. Furthermore, our results
are not driven by more vulnerable firms being less productive or having experienced slower
productivity growth before the crisis, or differing from less vulnerable firms along other
dimensions.